We Are Already Hyper Inflating

ForEx jocks make or lose coin by guessing the direction of EUR/USD. Stock pick acesride the wave and look good while trends remain in place. Commodity bulls can’t missuntil the next miss is eventually driven home with a loud crash. It seems as if everybodyis clinging to a conventional way of doing things, as if the world was not radicallychanged in and around 2001, and as if the old rules of the previous secular bull marketstill apply. They do not; it is the age of inflate-or-die, booms and busts.

As for deflation believers, while they may be diametrically opposed to the vast bullishapparatus that depends on ever increasing debt levels and currency depreciation, they areright there with their bull counterparts, generally playing to convention and playing byrules they think they know; following breadcrumbs laid out for them to follow as theyissue dire projections about credit contraction and violent asset markdowns.

Let’s quiet the noise and look at the US Treasury bond market, which is arguably themost important market on earth, as it is intimately tied to the world’s reserve currency.

The following chart shows the T-Bill yield (IRX), the broad US market (SPX) and theCRB commodity index as measured against the beautiful continuum that is the wellbehaved yield on the 30 year Treasury Bond (grey shaded area). The continuum is ofcourse framed by the declining 100 month exponential moving average and the lower reddotted trend line that parallels it.

As applies to the current system, convention went out the window in late 2000 as theS&P 500 took a dive (to conclude its secular bull market) and was promptly attended by acrashing T Bill yield as Alan Greenspan goosed the curve, launching gold’s secular bullmarket in the process. After a lag, general commodities followed gold higher as dideventually, the SPX. With T-Bills at what we thought at the time was an outrageous 1%,the system was re-liquefied.

This was Greenspan’s willful attempt to re-inflate the economy and we all know whateventually happened; capital was created out of nowhere, and misallocated into the mostdangerous ‘investments’, overseen by the best, brightest and most connected on WallStreet, who of course made a killing packaging newly engineered creations. The malinvestmentseventually manifested in an epic and terminal crash. The age of inflate-or-diegoes hand in hand with moral hazards being routinely mainlined into the system.

Looking at the chart, the lower red dotted trend line and the EMA 100 form the backboneby which all of this surreal finance has been supported since the age of inflationonDemand began its most intense phase, in 2000. Be aware that the shaded area formatof the monthly chart shows monthly closing data, so it does not show the several timesthe yield pinged the critical EMA 100 intra-month before reversing lower.

Heck, let’s review our favorite chart below, illustrating the continuum. Pre-2000, thesystem ran quite well by leveraging global confidence in Uncle Sam and his Treasury, asGreenspan himself leveraged the goodwill force fed into the system by Paul Volcker,who did the heavy lifting in deciding that the inflation problem of the 70’s would end onhis watch, no matter the cost. Sadly, his successor at the Fed had no such resolve as hewas given the gift of goodwill. The reason we now find ourselves in a metaphoricalWonderland is because Ben Bernanke has amped up the inflation ante even though hispredecessor left him with no seed corn, no goodwill whatsoever. Yet still he inflates.

Post-2000, with the implosion of paper asset markets that had concluded a secular bullmarket, and considering the inflationary policies in response, one might have expectedlong term yields to become unruly as the precious metals and then the commoditycomplex began to rise, sniffing out the creation of ‘funny munny’. Instead, the long bondyield remained well behaved within the continuum as the free enterprise dominated USand Communist China pursued a cozy relationship of convenience, which could best bedescribed as a macro economic vendor financing scheme (‘we will outsource ourindustry, leverage confidence and credit and become your consumer engine if you willconvert your US currency reserves to Treasury bonds, helping us stay liquid’).

This was an epic pyramid scheme by which the US created paper (debt) and used it tocontinue running its economy on the vaunted US consumer. All the while, PE ratioswere calculated, rosy projections were made and bountiful bonus seasons came andwent… all based on the lie that pretends productivity can be printed through debt.

In 2008, the continuum did something asymmetrical as the yield plunged into whatNFTRH calls Armageddon ’08. Time Magazine published a cover showing bread linesand ‘Depression 2.0’ headlines and the conventional herd went absolutely hysterical.This was to the benefit of the people who were able to remain calm and get bullish. Thedeflation event was on and the most gullible deflation believers took the breadcrumbs.

Now a mature rebound in both asset markets and the bond’s yield brings us to acrossroads and a question; will another red dot appear at the EMA 100 as inflationexpectations peak and the entire construct reverses into yet another deflationary episode,or will it be different this time as the inflationary horse gets out of the barn due to asaturation point at which the public no longer buys the deflation spook that Ben Bernankekeeps pulling out of the closet? This would propel an equal and opposite upside reactionto the lower channel buster that was the most recent green dot.

The script would typically call for the predictable (to contrarians) downturn into a newdeflationary episode, and that may well be in store. But we have to realize thatconfidence has hit a saturation point, as outward signs of rebellion surface withinmainstream society. Meanwhile, the Fed chief and his sycophants continue full speedahead, scaring the crap out of most everyone with a modicum of economic acumen in theprocess; but people are not afraid of deflation now. Inflation fears will break out if theEMA 100 gives way. This would be uncharted territory for the current system.

Here are some money supply graphs for consideration. From the St. Louis Fed, M2:

MZM:

From the excellent website Nowandfutures.com (see the description of the mechanicsinvolved in reconstructing M3 http://tinyurl.com/nftrh115a):

As a ‘bottom feeder’ biased chart guy, what I see in the green M3 line is a gentle, rollingbottom. The kind of bottom I usually buy.

The US continues inflating and the bond is the confidence tool used to promote theongoing, systematic inflation that, other than benefiting those speculators who know howto use the process, would stiff foreign creditors and tax the American people in a waythey are not generally yet up in arms about; the loss of purchasing power of the UScurrency in which they are compensated and in which they conduct commerce.

Was the May ‘Flash Crash’ a surrogate ‘deflation’ event off of the modest peaks in MZMand M3 (and the mere flattening of growth in M2)? This event certainly provided thebullish fuel for the next leg up in markets, led by silver and the precious metals complex.Was that the afterburner needed to propel the long bond’s yield into an upside channelbuster? Or will the bond be rigged in new and innovative ways as the Fed does its dutyas the buyer of last resort?

Are they the buyer of last resort? What about patriotic Americans and all that retirementfund money just sitting there? Surely they could buy bonds as well, for the greater good.IRA holders are in bed with Uncle Sam after all, as he sponsors these vehicles and deferstheir taxes. We know one thing, somebody has got to buy enough bonds to keep thepretense in place that things remain in control.

Summary: The ability to continue the inflation is centered on Treasury bonds.Ironically, the ongoing inflation depends on widespread belief that deflation can happenand must be fought. Deflation can happen all right, but it will be the FINAL deflation,with no coming back from it, at least within the confines of the current system. So it willbe important to observe the yield’s approach of the EMA 100 and its subsequent reaction.Will the yield turn down and continue the boom-bust continuum, or will it go channelbuster up in an inflationary signal that even the most casual observers will take note of asa collective ‘Rut Roh!’ is emitted far and wide?

We do not have the answer yet and thus, risk is elevated for bulls and bears, inflationistsand deflationists. That is because we are once again at a flash point. Ben Bernanke istrying like hell to keep the inflation going, and with the mind boggling trillions in stillincreasing debt, there is only one politically expedient way out. That would be to keepthe scheme going as long as possible. But please do not tell me that here, on the doorstepto 2011, sublime levels of unpayable debt in tow, we have not already hyper inflated. Wehave, but the ongoing T Bond confidence scheme continues to cover it up… for now.

Now let’s proceed to the good stuff, the investment stance and vehicles used to capitalizeon this sad state of affairs…

[NFTRH then proceeds on with an extensive update of gold vs. currencies and commodities, precious metals technical analysis, portfolio structure (speculative portfolio +39% for 2010) and a sentiment view of the broad markets, which is at an extreme.]

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